Stockbrokers Fail the Duck Test

The New York Times
January 4, 2005

Stockbrokers Fail the Duck Test

If a stockbroker was "earning" a free trip to Hawaii for selling you a certain stock, wouldn't you want to know? Good luck in trying to find out.

Since 1999, the Securities and Exchange Commission has exempted brokers from rules that require registered investment advisers to act in their clients' best interests and to disclose fully their qualifications, disciplinary histories and conflicts of interest. The rationale is the idea that brokers are primarily salespeople, not advisers, and that any advice they give must be "solely incidental" to making a sale. That's odd, given that brokerage firms increasingly call their brokers "consultants" or "wealth managers" and pay them fees for an array of services, not just commissions on sales.

Fed up with the double standard, the trade organization for financial planners sued the S.E.C. last year. The commission asked the court for more time, promising to resolve the matter by the end of 2004. In December, the agency acted - by deferring a decision until April 15, 2005. In the meantime, it will solicit public comments focused mainly on how to define "solely incidental." The definition is important because the S.E.C. clearly wants to continue to exempt brokers on that basis.

We have some comments to offer. If brokers are marketed by any name other than "stockbroker," or if they earn fees in addition to, or in place of, commissions, it's safe for the S.E.C. to assume - as the public undoubtedly does - that they're investment advisers. Accordingly, they should follow the same rules that govern registered investment advisers. Trying to establish a test based on what is or is not "solely incidental" to a stock sale is a joke - on investors.

It's the S.E.C.'s job to protect individual investors, not to reassure the securities industry that its brokers are safe from regulatory standards.